Fulton Financial Stock: higher provision to reduce profits this year


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Profits of Fulton Financial Corporation (NASDAQ: FULT) will most likely decline this year due to the anticipated normalization of loan loss provisions. In addition, the rising interest rate environment will reduce mortgage bank income. On the other hand, economic strength will drive loan growth, which in turn will support the bottom line. In addition, higher interest rates will increase the net interest margin. Overall, I expect Fulton Financial to report earnings of $ 1.32 per share in 2022, down from the expected earnings of $ 1.65 per share for 2021. The current market price is fairly close to the target price for the coming year. Therefore, I take a neutral rating on Fulton Financial.

Higher fares, a strong economy to drive the top line

Fulton Financial Corporation’s net interest income grew 6.5% in the first nine months of 2021 year over year. The outlook for net interest income growth remains optimistic for 2022, in part due to rising interest rates. According to management’s interest rate sensitivity analysis, an instantaneous change in interest rates of 100 basis points can increase net interest income by 6.8%, as mentioned in file 10-Q . This sensitivity is based on the assumption of an instantaneous variation in interest rates. The impact of a gradual increase in rates will be much smaller. Nonetheless, net interest income will benefit from the anticipated hike in the federal funds rate and the deceleration of the federal bond purchase program.

In addition, Fulton Financial’s book already showed promising trends in the third quarter. Management mentioned on the conference call that the growth in commercial line usage during the quarter was really encouraging. In addition, management expects assemblies to continue to accelerate thanks to a strong pipeline.

In addition, economic strength will stimulate demand for credit. Fulton Financial operates in the mid-Atlantic markets of Pennsylvania, Maryland, Delaware, New Jersey and Virginia. In terms of inflation, while some markets, like Virginia, perform better than the national average, others, like New Jersey, are much worse. Therefore, instead of considering statewide measures, it is better to take the national average. The following charts show the positive trends in GDP, the Purchasing Managers’ Index and the unemployment rate.

US real GDP, unemployment rate
Data by YCharts

On the other hand, the following reasons are likely to limit revenue growth.

  1. The upcoming delivery of PPP loans. Fulton Financial still has a large outstanding Paycheck Protection Program (“P3”) loan balance that has yet to be canceled. According to the details given in the last presentation, PPP loans represented around 3.2% of total loans at the end of September 2021. As the share of PPP loans in total loans is significant, the upcoming cancellation will have a significant impact on the total size of the loan portfolio. .
  2. Hanging around money. Fulton’s cash and cash equivalents jumped to $ 2.5 billion at the end of September 2021, from $ 1.8 billion at the end of December 2020 and $ 0.5 billion at the end of December 2019. This excess cash problem put margin under pressure in recent quarters. Management mentioned during the conference call that they are looking to deploy excess liquidity into more profitable asset classes. However, such a rebalancing will probably be very difficult to achieve due to the tolerance of PPP discussed above. In addition, other banks are also looking to resolve their respective excess liquidity issues, which will keep competition high in the markets. Fulton’s excess cash position is likely to get worse before it gets better.
  3. Higher interest rates. The high rates will affect both the refinancing and mortgage buying markets. (Note: Fulton Financial issues mortgages for sale and investment. The loan balance, and therefore net interest income, is affected by mortgages issued for investment purposes, and non-interest income is affected by mortgages issued for sale).

Given the headwinds and headwinds discussed above, I expect net interest income to increase 4.5% year-on-year in 2022. Additionally, I expect the loan balance increases by 4% this year, which is close to the pre-pandemic level. The following table shows my balance sheet estimates.

Finton Fulton - Financial Position

Loan growth to help normalize provisioning

Fulton Financial has reported net provision reversals of $ 10 million in the first nine months of 2021. Further reversals cannot be ruled out as the provisions appear to be excessive relative to the portfolio’s credit risk. Endowments represent 1.41% of total loans, while non-performing loans represent 0.82% of total loans at end-September 2021, as mentioned in the presentation.

Due to the anticipated growth in single-digit loans, the allowance for expected loan losses will likely increase this year. Overall, I expect the provision charge, net of reversals, to return to a normal level in 2022. The provision charge represented 0.18% of total loans from 2016 to 2019. For 2022, I m ‘Expect the provision charge to rise about 0.17% of total loans.

Expect earnings of $ 1.32 per share in 2022

The higher provision charge will likely weigh on earnings this year compared to last year. In addition, non-interest income will most likely decline because the rising interest rate environment will reduce mortgage refinancing activity. As a result, mortgage banking income will be brought back to a more normal level this year. the Mortgage Bankers Association Mortgage refinancing arrangements are also expected to return to almost pre-pandemic levels this year, as shown below.

Fulton Financial Mortgage Originating Volume Forecast

On the flip side, the expected margin expansion and mid single-digit loan growth will likely support the bottom line. Additionally, the efficiency ratio will likely continue to improve in 2022. Fulton Financial has consolidated several branches in recent years and moved to online platforms, as mentioned in the presentation. The company has improved its digital capabilities, which include a cloud-based mortgage origination system that launched in 2020.

Overall, I expect Fulton Financial to report earnings of $ 1.32 per share in 2022. For the last quarter of 2021, I expect the company to report earnings of 0.39 $ per share, which will bring annual earnings to $ 1.65 per share. . The following table shows my income statement estimates.

Fulton financial income statement

Actual profits may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic, particularly the Omicron variant.

Current market price above the end-of-year target price

Fulton Financial offers a 3.5% dividend yield at the current quarterly dividend rate of $ 0.14 per share and a special dividend of $ 0.08 per share. Fulton Financial typically announces a special dividend in the last quarter of the year. Estimates of earnings and dividends (including the special dividend) suggest a payout rate of 49% for 2022, which is not much higher than the 2016-2019 average of 44%. Therefore, I don’t think there is a threat of lower dividends despite the prospect of lower profits.

I use the historical price / earnings (“P / TB”) and price / earnings (“P / E”) multiples to value Fulton Financial. The stock has traded at an average P / TB ratio of 1.45 in the past, as shown below.

Fulton Financial Average Market Price

Multiplying the average P / TB multiple by the tangible book value per forecast share of $ 12.9 yields a target price of $ 18.7 for the end of 2022. This price target implies a 2.4% increase. compared to the closing price on January 7. The following table shows the sensitivity of the target price to the P / TB ratio.

Fulton Financial Price target

The stock has traded at an average P / E ratio of around 12.7x in the past, as shown below.

Fulton Financial EPS

Multiplying the average P / E multiple by the expected earnings per share of $ 1.32 yields a target price of $ 16.7 for the end of 2022. This price target implies an 8.5% decline from at the January 7 closing price. The following table shows the sensitivity of the target price to the P / E ratio.

FULL share price

The equal weighting of the target prices of the two valuation methods results in a combined target price of $ 17.7, which implies a decrease of 3.0% from the current market price. Adding the term dividend yield gives an expected total yield of 0.5%. Therefore, I take a neutral rating on Fulton Financial. I would only consider investing in the stock if its price drops more than 12% from its current level.

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